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Just for kicks, here is a brief layout of financial employers.
-Commercial banks (i.e. B of A, Citibank)
Commercial banks tend to ask less of their employees, pay less, and give them less interesting work. The plus side is that they offer better job security and there’s more room for shifting around the banking industry to find a better fit.
-Investment banks (i.e. Goldman Sachs, Morgan Stanley)
Investment banks are considered the gold-plated jobs in the financial industry. They pay extremely well and offer some of the most interesting work in the industry. However, they also demand the most of their employees and aren’t afraid to fire anyone who isn’t top quality. Expect to work 15+ hour days and get laid off if you have a bad week.
-Hedge funds
Hedge funds are the cowboys of the financial industry. It is a very volatile industry and most employees can expect to be looking for another job within 6 months. In the meantime, they can make an obscene amount of money. And/Or be investigated by the SEC.
-Accounting firms
Accounting firms often have consulting or financial arms that offer work. Like most accounting jobs, they pay well, have good job security, and are often willing to pay for continuing education. The downside is that you are far from the action and since the top notch are in the previous three areas, it’s difficult to find someone good to learn from.
-Software companies
With a growing focus on complex mathematical models and thus increasingly fewer people who understand finance, statistics, economics, mathematics, and computer programming at the requisite level, financial companies have been outsourcing their computational needs to software companies. They have the same qualities as accounting firms. Software companies also tend to be small so there is even less room for upward movement.
The rule of thumb is that the closer you are to the money changing hands, the better and more interesting the job. Naturally, being close to the action necessarily means the job is very intense and employers demand a lot in time and quality. It should be noted that starting salary and bonuses are not a good measure of the quality of a job, at least not compared to the type of experience one gets, upward mobility, turnover, and the quality of the team. In the financial industry, if you’ve been in the same place for more than 2-3 years and haven’t moved up, you’ve been pigeon-holed and are in danger of stagnating.
A primer on quantitative easing and what the Fed is trying to do:
http://www.ft.com/cms/s/0/8ada2ad4-f3b9-11dd-9c4b-0000779fd2ac.html
It’s a video, so here are the highlights if you can’t or don’t want to watch it:
-normally central banks set interest rates to regulate monetary policy
-interest rates cannot be below zero (it makes no sense for banks and would force people to stuff money in mattresses)
-so the Fed creates new money, increasing its own credit which is backed by the government
-it buys every asset in sight, increasing the price and yield of bonds and other assets
-this should encourage greater demand (and reduce bad assets), giving banks an incentive to lend and picking the economy out of recession
now the risks:
-the Fed could lose money on its purchases, and remember that the taxpayer is on the hook for the government’s losses
-this increases consumer prices, which could spiral into unstoppable inflation and destroy the value of the dollar
-this strategy depends entirely on market confidence, it can be counterproductive if people don’t think things are better
-must be done extremely aggressively or it won’t work, this is why it’s very risky and the central bank only does it as a last resort
-because it’s a last resort, it is necessarily rare, which means we have no empirical evidence how much is enough
I read a very interesting solution this morning to create de facto negative interest rates and spur spending. The Treasury could randomly pick a number 0-9 and say that every bill ending with that number will be worthless. That would create a massive game of hot potato as people tried to shed themselves of the dreaded bills, speeding transactions in the country. I don’t think it will happen, but it’s a fascinating idea.
From today’s Wall Street Journal:
Public relations disaster of the year: The three CEOs of America’s car industry, for flying private jets to Washington to beg for a bailout because they’re running out of money. What better way to illustrate how out of touch they are with the American public? Runner-up: John Thain, CEO of Merrill Lynch. He was hailed as a hero for saving his firm with bailout money, only to blow it by demanding his bonus.
Swimming naked award: This refers to a joke by Warren Buffett that anybody can succeed in finance when times are good, but you find out who’s been swimming naked (taking stupid risks) when the tide rolls back. The winner is Iceland, whose entire economy exploded because a few people in America defaulted on their mortgages.
Fight of the year: Dick Fuld versus his own employees. Fuld presided over Lehmen’s demise and an anonymous employee attacked him in the office gym. Fuld was knocked the fuck out with a single punch, ironically mirroring his firm’s problem of having a glass jaw.
Best letter of the year: Congressman Henry Waxman with unmasked schadenfreude when he demanded that all Wall Street firms bailed out by the government publicly list their top earners, their bonuses, and how this was calculated.
Flop of the year: Sovereign wealth funds. Earlier in the year, they were the new financial monster as government-backed funds from China and Dubai were anticipated to simply buy the entire world. Then they were going to buy our financial system when it was in peril. Now the Chinese and Arabs are counting their massive losses and wondering what happened to the money. Turns out economies dependent on cheap manufactured products and oil have a massive gap in their strategy when consumers stop buying.
Client of the year: Eliot Spitzer, aka Client Number Nine. Wall Street didn’t have much to cheer in 2008, but the fall of New York’s most hated regulator in a sex scandal was one of them.
Worst abbreviation: The early winner was structured investment vehicle, or SIV. The new winner is TARP, troubled asset relief program. Someone needs to re-think these names and find out if they could have terrible ramifications like these are having now.
Poorly timed nickname: joint winners are Whole Foods Market and Starbucks. They earned their nicknames of Whole Paycheck and Fourbucks, and true to that, consumers stopped going when the economy got rocky. Both have stocks that are down more than 50% for the year with even uglier forecasts for 2009.
Saved the Universe award: Warren Buffett. His timely investments saved General Electric and Goldman Sachs from the humiliation of requiring a bailout. Masters of the Universe breathed a sigh of relief.
Comeback kid: Cash, which is once again king. Others thought this might be the year when oil, China, environmentalism, or hope and change might be the new hottest commodity. But at the end of the day, cash is indisputably still the only commodity that matters. Runner-up: Bank of America, which now has enough of the US government’s cash to deserve the name.
I want to be more active on my blog beyond just tracking my daily habits, so I decided to add a new financial section where I plan on commenting on economic news. As I get more knowledge, hopefully my ability to predict and comment on current events will become more sophisticated. For now, here’s a classic post on economic history.
Today’s history lesson takes place at the height of the Great Depression, when the American public blamed greedy Europeans for World War I and the renewed gold standard for their deflation problems. A collection of Democrats, politicians from silver mining states, and currency speculators called for a return to bimetallism and using the silver standard to help stabilize the dollar. The gold standard was failing because too many countries were incorrectly pegged without a way to correct it; changes to currency pegs badly damaged a country’s reputation, as Argentina learned when it tried despite the warnings and ended up with massive bank runs as well as being shunned like a leper by the British Empire in trade (which made up more than 80% of Argentina’s trade).
The result of the ill-conceived new gold standard was hyperinflation in Germany (with the famous story of a guy running around with a wheelbarrow full of money to buy a loaf of bread, then being chased by a mob trying to steal his wheelbarrow) and wild deflation in Britain and the US. This is where a deep recession turns into the Great Depression because of the Federal Reserve. The Fed at the time believed that deflation could be turned if people had more disposable income from savings and decided to raise the interest rate. Incidentally, the idea of printing more money was rejected because the government was “committed” to trading gold for cash if demanded and feared bank runs if too much money circulated. Of course, the result of high interest rates was the ruin of society because people could not afford to pay the high interest rates on loans, especially in the farm sector. Employers laid off most of their workers to avoid the need to borrow more money, damaging their productivity and leaving many people without incomes.
The silver bimetallism people had been around since William Jennings Bryan nearly won the presidency on that issue in 1896, but the Great Depression was the ultimate failure of the gold standard. While silver had languished at a trading rate of 86 oz to 1 oz of gold, the silver politicians wanted it to trade at the “traditional” rate of 16 to 1 (it was traditional in the sense that this was the price written in the Constitution – like today, some thought the rule of the Constitution was absolute and the founding fathers never intended to change that price). With influential support, a bill to buy silver to the traditional rate passed in 1933 and the Fed started buying silver. President Roosevelt supported the silver legislation in a deal to push many of his New Deal reforms through an unwilling Congress. While times were great for silver between 1933-1937, the demand for silver plummeted after this short-run gain and effectively ended silver’s role as a meaningful currency because nobody wanted silver at such a high price in gold.
Where does China fit into all this? Well, China was among the few countries in the world that used a silver standard to peg its currency, since most of its gold supplies had been drained by Europeans in the unequal treaty era and many Europeans were only willing to pay for Chinese goods in silver (ironically, one reason that Europe went to the gold standard and abandoned bimetallism was the silver drain in paying for Chinese tea and silks, even with adjustments from the opium trade). When the Chinese heard that the US was paying premium prices for silver, there was a mad rush to sell every bit of silver in the country. People went so far as to melt their silver currency to sell to Americans. This crazed outflow of silver drained China of much of its reserves and caused severe deflation in that country, because now nobody had the proper silver to pay for anything in China. Of course, silver had been adjusted and pegged by the American market to be very expensive, so the Chinese government could not afford to buy back enough silver to fill its reserves.
By 1937, the Nationalist Chinese government was desperate for money because of the new Japanese and Communist threats. So they decided to abandon silver as a peg and print paper money, and just like every other n00b to print paper money from the 1778 Continental Congress in America to the Weimar Republic in Germany, they went crazy on the printing press and tried to outpace inflation by printing money faster. Even though the Chinese risked hyperinflation, it was clear in the late 1930s both that the Japanese intended to invade China and that the Chinese could not win with their current forces. The combination of brutal losses to the Japanese and the ugly effects of hyperinflation on Chinese society lost all credibility for Chiang Kai-Shek’s government and gave credence to Mao and the Communist cause.
So there you have it, FDR ruined the Chinese.
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